EUROPEAN NEIGHBOURHOOD AND PARTNERSHIP INSTRUMENT A ZERBAIJAN COUNTRY STRATEGY PAPER 2007-2013 2 Contents: EXECUTIVE SUMMARY 3 1. THE OBJECTIVES OF EU/EC COOPERATION WITH AZERBAIJAN 3 1.1. OVERALL EXTERNAL POLICY GOALS OF THE EU 3 1.2. STRATEGIC OBJECTIVES OF EU/EC COOPERATION WITH AZERBAIJAN 4 2. AN OUTLINE OF THE POLICY AGENDA OF AZERBAIJAN 6 2.1. GENERAL ASPECTS 6 2.2. INTERNAL POLICY 6 2.3 COOPERATION FOR THE PEACEFUL SETTLEMENT OF THE NAGORNO- KARABAKH CONFLICT 7 2.4. E XTERNAL POLICY 7 3. THE POLITICAL, ECONOMIC AND SOCIAL SITUATION 8 3.1 A NALYSIS OF THE POLITICAL SITUATION 8 3.2 ANALYSIS OF THE ECONOMIC SITUATION AND TRADE STRUCTURE 12 3.3 ANALYSIS OF SOCIAL DEVELOPMENTS 13 3.4 ANALYSIS OF THE ENVIRONMENTAL SITUATION 15 4. AN OVERVIEW OF PAST AND ONGOING EC ASSISTANCE 15 4.1. EC ASSISTANCE TO AZERBAIJAN 1991-2005 15 4.2. KEY LESSONS LEARNT FOR THE NEW PROGRAMMING CYCLE 16 4.3. COMPLEMENTARITY AND COORDINATION WITH OTHER DONORS 18 4.4. CONSISTENCY OF EC COOPERATION POLICY WITH OTHER CORE POLICIES OF THE EU (“POLICY MIX”) 19 5. THE EC RESPONSE STRATEGY 19 5.1. PRINCIPAL OBJECTIVE 19 5.3. INSTRUMENTS AND MEANS 23 Annex 1 28 List of abbreviations and acronyms 28 ANNEX 2 30 A ZERBAIJAN AT A GLANCE 30 ANNEX 3 33 A ZERBAIJAN - COUNTRY ENVIRONMENT PROFILE 33 ANNEX 4 38 P RIORITIES OF OTHER DONORS, INCLUDING MEMBER STATES 38 ANNEX 5 41 “P OLICY MIX” CONSIDERATIONS IN THE CONTEXT OF THE AZERBAIJAN CSP 41 3 EXECUTIVE SUMMARY This Country Strategy Paper (CSP) for Azerbaijan covers the period 2007-2013. Assistance to Azerbaijan over that period will be provided principally under the new European Neighbourhood and Partnership Instrument (ENPI) being established to promote the development of an area of prosperity and good neighbourliness between the European Union and the partner countries covered by the European Neighbourhood Policy (ENP). 1 In recent years Azerbaijan has been slowly (although not always coherently) pursuing an “evolutionary” reform strategy to develop democracy and a market economy in the country and to bring Azerbaijan closer to the EU. However, much remains to be done in the coming years. The principal objective of cooperation between the EU and Azerbaijan is to develop an increasingly close relationship, going beyond past levels of cooperation to gradual economic integration and deeper political cooperation, principally in the framework of the Partnership and Cooperation Agreement and the more recent European Neighbourhood Policy. EC assistance over the period covered by this strategy will therefore aim at supporting Azerbaijan’s reform agenda on the basis of the policy objectives defined in the Partnership and Cooperation Agreement (PCA) entered into force in June 1999 and the EU-Azerbaijan ENP Action Plan of 14 November 2006. The National Indicative Programme (NIP) for 2007-2010 translates this into support for three priority areas: 1) Democratic development and good governance 2) Socio-economic reform (with emphasis on regulatory approximation with the EU acquis), fight against poverty and administrative capacity building 3) Support for legislative and economic reforms in the transport, energy and environment sectors. This new Strategy Paper for Azerbaijan has been developed in close consultation with the Azerbaijani authorities and fully reflects national priorities. Member States, other donors and civil society organisations were consulted during the drafting process. 1. THE OBJECTIVES OF EU/EC COOPERATION WITH AZERBAIJAN 1.1. Overall external policy goals of the EU 1 Regulation 1638/2006 of 26 October 2006. 4 The EU promotes its values and interests by operating as a global economic and political player, using various instruments, ranging from the Common Foreign and Security Policy (CFSP), assistance and trade, to the external dimension of the EU’s internal policies. In particular, the EU strives to promote prosperity, solidarity, security and sustainable development worldwide. The EU’s development policy as expressed in the European Consensus for Development is driven by the primary objective of poverty reduction, with the complementary aims of promoting good governance and greater respect for human rights in a bid to ensure the stability and security of the countries in the regional context. At the same time, it emphasises the need for a differentiated approach depending on the context and the particular needs of individual states. These objectives also apply to Azerbaijan, and will help to achieve the Millennium Development Goals. It is of the utmost importance to the EU to define the right “policy mix”. This means that, in the light of the EU’s strategic external relations objectives, policy coherence needs to be ensured between all available instruments when dealing with Azerbaijan. 1.2. Strategic objectives of EU/EC cooperation with Azerbaijan Country-specific, regional and global strategic objectives together shape the EU/EC approach to cooperation with Azerbaijan: A mutually beneficial partnership promoting Azerbaijan’s transition In the Partnership and Cooperation Agreement (PCA) which entered into force on 1 July 1999 the EU and Azerbaijan committed themselves to establishing a partnership which provides for close political and mutually beneficial trade and investment relations together with economic, social, financial, civil scientific, technological and cultural cooperation. The partnership is intended, in particular, to promote Azerbaijan’s transition to a fully fledged democracy and market economy. Implementing the European Neighbourhood Policy (ENP) and the EU-Azerbaijan ENP Action Plan The objective of the ENP, launched in the context of the 2004 round of enlargement round, is to share the EU’s stability, security and prosperity with neighbouring countries, including Azerbaijan, in a way that is distinct from EU membership. The ENP is designed to prevent the emergence of new dividing lines in Europe by offering neighbouring countries closer political, security, economic and cultural ties. It also addresses one of the European Union’s strategic objectives set in the European Security Strategy of December 2003, namely to bolster security in the EU neighbourhood. ENP partners expect to gain closer cooperation with the EU, the chance to participate in EU programmes and achieve deeper economic integration with the EU, lending strong 5 support to their own political and economic reforms. In the case of Azerbaijan, specific objectives are established in the EU-Azerbaijan ENP Action Plan which was jointly endorsed on 14 November 2006. Security challenges In the European Security Strategy of 12 December 2003, the EU acknowledged that, as a Union of 25 states with over 450 million people producing a quarter of the world’s gross domestic product (GDP), it is inevitably a global player. One of the key policy implications of the European Security Strategy is the need for the EU to “promote a ring of well governed countries to the East of the European Union and on the borders of the Mediterranean with whom we can enjoy close and cooperative relations”. In addition to this, the Strategy clearly acknowledges the importance of promoting an international order based on effective multilateralism. The Strategy also identifies the challenges for the EU to ensure security of energy supply. As an oil and gas producer and transit country, Azerbaijan has a pivotal role to play in this, including by opening up of alternative transportation routes for energy resources from the Caspian and Central Asia to Europe. The EU has both direct trade and political interests in fostering regional cooperation in various sectors including energy and transport. The EU/EC, finally, also aims at stabilising the whole Southern Caucasus region by supporting the peaceful settlement of the Nagorno-Karabakh conflict between Armenia and Azerbaijan. Should a peace deal be struck and actively implemented within the lifespan of the present CSP, several basic assumptions of the strategy might change quite radically and, consequently, the EC’s approach to assistance should be updated. Development policy objectives The EU’s development policy is driven by the overriding objective of poverty reduction with the complementary aims of promoting good governance and respect for human rights. 2 At the same time it emphasises the need for a differentiated approach according to contexts and needs. Azerbaijan used to be classified as a transition country in the OECD Development Assistance Committee’s (DAC) list of aid recipients. With a GNI per capita of US$ 940 (2004, Atlas method) 3 and falling into the category of lower-middle income countries it was recently (December 2005) included in the new single list of Official Development Assistance (ODA) recipients. 2 The key principles of the EU’s development policy are set out in a recent Communication from the Commission to the Council and the European Parliament which will form the basis for a Joint Declaration by the three institutions. 3 Note that PPP-adjusted GNI per capita (Atlas method) is US$ 6 250 for 2004. Note also that these figures do not include the informal economy, which plays an important role in Azerbaijan. 6 2. AN OUTLINE OF THE POLICY AGENDA OF AZERBAIJAN 2.1. General aspects Azerbaijan is pursuing an “evolutionary” reform strategy to develop democracy and a market economy in the country and to bring Azerbaijan closer to the EU. However, much remains to be done in the near term and the country’s efforts to move forward will have to be more sustained and consistent. The Azerbaijani leadership has clearly stated that it is firmly committed to using the EU- Azerbaijan ENP Action Plan, jointly endorsed by Azerbaijan and the EU on 14 November 2006, as a key tool to promote its reform objectives. On this basis, the current policy objectives of Azerbaijan can be summarised as follows: 2.2. Internal policy Consolidating democracy, protection of human rights and fundamental freedoms: Azerbaijan has clearly committed itself to strengthening the stability and effectiveness of institutions guaranteeing democracy, protection of human rights, media and fundamental freedoms, as a basis for more general consolidation of the rule of law. Consolidating the judiciary: The government has declared its intention to carry out further judicial and legal reform in order to guarantee the independence of the judiciary, strengthen its administrative capacity and ensure the impartiality and effectiveness of prosecution. Promoting balanced economic growth and the fight against poverty: The government places much emphasis on the need to further develop the country’s energy sector and to use part of the expected oil and gas revenues to ensure balanced socio-economic development, supporting the non-oil sector of the economy and the development of regions outside Baku. Effective fight against crime and corruption: The government has declared the fight against corruption a top priority. The programme calls for a competitive market climate that reduces special privileges and opportunities of state capture by large financial industrial groups. Public sector reform: The government has declared its intention to promote comprehensive public sector reform, including both administrative reform and the regulatory reforms needed to improve public governance. 7 Improving the investment climate: Actively addressing the broad range of issues affecting the investment climate with a view to strengthening investors’ confidence is a key component of the government’s approach to further economic growth. 2.3 Cooperation for the peaceful settlement of the Nagorno-Karabakh conflict The EC will continue its current strong commitment to supporting a peaceful settlement of the Nagorno-Karabakh conflict. This involves, amongst other activities, continuing support for civil society and the promotion of democratic values and respect for human rights throughout Azerbaijan. If the Nagorno-Karabakh conflict is settled within the timeframe of the present CSP, the EC will provide further specific assistance to help consolidate the settlement, including the reconstruction and rehabilitation of conflict areas, the return to conflict areas of Azerbaijani IDPs and refugees and the elimination of the excessive accumulation of conventional weapons such as SALW (small arms and light weapons) and ERW (explosive remnants of war, including landmines). Under the appropriate financial instrument, the EC could also provide support for confidence-building initiatives in the South Caucasus region. 2.4. External policy EU approximation: Deepening its relations with the EU is one of the top priorities of the Azerbaijani government; in order to support these efforts, an intergovernmental committee was created last year by Presidential Decree. Azerbaijan intends to pursue its policy of integration with the EU through the implementation of the PCA and the ENP Action Plan. Enhanced energy relations between the EU and Azerbaijan will play an important role in this context. Cooperation with Russia : Azerbaijan recognises that good bilateral relations with Russia are important, and that Russia is a key neighbour with strong political, economic and social interests in Azerbaijan. Russia also remains an influential player as regards the protracted conflicts in the Southern Caucasus, including the one with Armenia over Nagorno-Karabakh. Energy cooperation with the Russian Federation is and will remain in the near future another important feature in the short term of the relations between the two countries. Finally, it has to be considered that around 2 of the 8 million inhabitants of Azerbaijan live and work in the Russian Federation. Cooperation with Turkey: Mainly for historical and cultural reasons, Azerbaijan has very close ties with Turkey, the first country to recognise Azerbaijani independence in 1991. In the short and medium term, the state of the relations between Azerbaijan and Turkey will 8 be shaped by several factors, among them the European aspirations of Turkey and the opening of the Baku-Tbilisi-Ceyhan and the Baku-Tbilisi-Erzurum pipelines. Cooperation with Iran: The division of the Azeri people between Iran and Azerbaijan has periodically led to tensions between the two countries. Both groups share the same language and are mainly Shiite Muslims. The notion of Azerbaijani reunification, or "one Azerbaijan", which was popular in the 1940s, and re-emerged under Heydar Aliyev's leadership of Soviet Azerbaijan, was raised again after independence by the Popular Front government. This ideology was potent enough to poison Iran-Azerbaijan relations. Iran continues to monitor nationalist sentiment carefully in its Azerbaijan province. Azerbaijan claims to have mastered the issue of import of Islamic fundamentalism from Iran. Regional role: Good relations with Georgia are equally important for Azerbaijan’s access to (mainly oil and gas) international markets. Further deepening and intensification of regional cooperation in the Southern Caucasus is hindered by the conflict in Nagorno- Karabakh. Azerbaijan is clearly committed to playing a constructive role in the wider region, including by cooperating in the framework of GUAM, in the Black Sea Economic Cooperation (BSEC) organisation, the Commonwealth of Independent States (CIS), the OSCE, the Council of Europe and the Organisation of the Islamic Conference (OIC). Azerbaijan is also a member of the United Nations, the International Monetary Fund, the World Bank and the European Bank for Reconstruction and Development. Promoting trade: Trade policy issues are an important part of the government economic strategy. The peculiar structure of the country’s exports (oil products and chemicals account for 94% of Azerbaijan’s exports to the EU) make it important and urgent for Azerbaijan to diversify its economy and improve trade-related regulations and administrative practices. In this respect, the slow progress on WTO accession, despite the fact that this is a stated priority for the government, is a source of concern. NATO accession: Azerbaijan has not begun to negotiate a Membership Action Plan, which would be essential for accession to NATO, but the leadership does have ambitions to join NATO. Azerbaijan joined NATO’s Partnership for Peace process in 1994 and is determined to further its cooperation with the Alliance through implementation of the Prague initiatives (Partnership Action Plan against Terrorism and Individual Partnership Action Plan) and to contribute further to security and stability in the whole Euro-Atlantic area. 3. THE POLITICAL, ECONOMIC AND SOCIAL SITUATION 4 3.1 Analysis of the political situation General aspects 4 See Annex 3 for a detailed description of the environmental situation in Azerbaijan (Country Environment Profile). 9 Azerbaijan’s political and security situation is heavily influenced by its geographic position, squeezed as it is between the Russian Federation and Iran, the availability of sizeable energy resources and the protracted conflict with Armenia over Nagorno- Karabakh. Much of Azerbaijan’s future overall progress will depend on the successful peaceful settlement of this protracted conflict, which has so far held back Azerbaijan’s internal development in the social, institutional, political and economic sectors, and limited the country’s involvement in regional cooperation activities. Internal situation The last parliamentary elections, held on 6 November 2005, remarkably consolidated President Ilham Aliyev’s grip on power. The elections were harshly criticised by most international observers (including OSCE/ODIHR, Council of Europe, European Parliament and Nato Parliamentary Assembly), who indicated that, despite some improvements compared to the past, a number of steps still have to be taken to fulfil Azerbaijan’s international commitments to political and institutional reforms. Even before the elections, the purges which took place in October 2005, while allegedly aimed at addressing the severe problem of corruption in governmental circles, had further reinforced President Aliyev’s control over the State administration; it is difficult to see how he can fail to be re-elected in the 2008 Presidential elections, also given the fact that the opposition has so far failed to present itself as a credible alternative and remains weak and fragmented. The reform process in the political and institutional sphere has been proceeding very slowly and not always in a coherent way; the distribution of powers is still heavily biased towards the President of the Republic and neither the Parliament nor the judiciary appear to be sufficiently strong to counterbalance the predominance of the executive power. This institutional system appears well suited to a country which, since its independence, has always had mild authoritarian regimes based on a complex mix of political allegiance, clan solidarity and economic interests. Further progress towards democratisation of the country and an improved protection of human rights, fundamental freedoms (including freedom of assembly) and independent media, including printed press, radio, television and the Internet, as well as the further growth of civil society, appear absolutely indispensable to ensure a truly pluralistic and democratic development of the country. To this end Azerbaijan will have, in parallel with the implementation of the PCA and the ENP Action Plan, to pursue its cooperation with international organisations such as the Council of Europe and the OSCE to fulfil the international obligations it subscribed to when joining these bodies. The Azerbaijani government, State institutions and political parties will soon have to face the challenge of managing the expected huge inflow of revenues from oil and gas production and transit to the benefit of the overall modernisation of the country. A major overhaul of the public administration, stepping up the fight against corruption and 10 placing an increased emphasis on the transparent and accountable management of these financial resources will be key to ensuring the sustained and sustainable development of Azerbaijan. Justice, Security and Freedom affairs will also require special attention. The situation of refugees and internally displaced persons (IDPs) remains problematic. According to the UNHCR, there are around 1 million refugees and IDPs in the South Caucasus region (some 580,000 IDPs in Azerbaijan alone). Azerbaijan shares borders with seven countries, with a total length of 3371 km, including 713 km of sea border. The modernisation of the State Border Service is an urgent priority aimed to countering drug smuggling, trafficking in human beings and illegal migration, principally from Afghanistan, Iran, Iraq and Pakistan. Azerbaijan is the only Muslim republic in the former Soviet Union where the Shiite branch of Islam is dominant. The Shiites form a majority in the southern oblasts bordering Iran, in central Azerbaijan and in Baku. Sunnis predominate in northern and western Azerbaijan. Another interesting feature of Azerbaijan is that the Caucasus Spiritual Board of Muslims, headed by Sheikh Ul' Islam Pashe-zade, exerts an influence on both Shiites and Sunnis. Traditionally, the head of this spiritual board is a Shiite and his deputy a Sunni. Interestingly, unlike in most Muslim countries, Shiites and Sunnis often worship in the same mosque. Azerbaijan has managed so far to keep at bay Islamic fundamentalism, principally thanks to the traditional secular orientation of the State (following the Turkish “Atatürk” model and drawing on the Soviet legacy). Should the Azerbaijani ruling class not manage to implement the necessary socio-economic reforms, in particular those aimed at fighting the still widespread poverty, Islamic radicalism could become a more concrete danger, but only in a medium to long-term perspective. External situation Since independence, Azerbaijani foreign policy has followed a “multi-vector” and balanced approach in its relations with the EU, Turkey, Iran and other Caspian Sea neighbours, the Russian Federation and the US. The Azerbaijani foreign policy agenda is dominated by the ongoing conflict with Armenia over Nagorno-Karabakh. A breakthrough was expected at the last meetings between President Aliyev and his Armenian counterpart Kocharian, which took place in Rambouillet, near Paris, in February and in Bucharest at the beginning of June 2006. No deal was struck on those occasions and this triggered some disappointment in the international community, which felt that both countries should have made more of an election-free year. However, the talks between the two sides continue, at different levels. The Russian Federation plays a major role in Azeri foreign policy and, more broadly, in the Southern Caucasus, including in the regional disputes such as the demarcation of the Caspian Sea and the Nagorno-Karabakh conflict. Moreover, about a quarter of Azeri nationals work and live in Russia and Russian gas is still needed inter alia for heating and [...]... Europe European Investment Bank European Bank for Reconstruction and Development European Commission Humanitarian Aid Office European Initiative for Democracy and Human Rights European Neighbourhood Policy European Neighbourhood and Partnership Instrument Foreign Direct Investment Food Security Programme Free Trade Agreement Gross Domestic Product Gross National Income Georgia, Ukraine, Azerbaijan and. .. settlement and settlement consolidation Priority Area 1: Support for Democratic Development and Good Governance Sub-priority 1: Public administration reform and public finance management, including public internal control and external audit Sub-priority 2: Rule of law and judicial reform Sub-priority 3: Human rights, civil society development and local government Sub-priority 4: Education, science and people-to-people... Financial Institutions International Monetary Fund Justice and Home Affairs Justice, Liberty and Security Millennium Development Goals Memorandum of Understanding Non-governmental organisation Neighbourhood and Partnership Programme Organisation for Economic Cooperation and Development Organisation for Security and Cooperation in Europe Partnership and Cooperation Agreement Purchasing power parity Regional... mobility scheme for scientists and practical training at the seven institutes of DG Joint Research Centre (DG JRC) 5.3 Instruments and means From 2007 on, EC assistance will be provided through a set of new instruments While the European Neighbourhood and Partnership Instrument (ENPI), including not only its national but also its transnational/regional, cross-border and thematic components, will be... including: • Customs legislation and procedures, to make them compatible with international and EU standards, in particular with a view to facilitating trade with the EU, and to meet the World Customs Organisation's standards on security of the international trade supply chain; • Technical regulations, standards and conformity assessment, sanitary and phytosanitary issues (SPS); • Right of establishment and. .. organised crime and international terrorism, and improving migration and asylum management The EC is also providing support to help Azerbaijan address the problem of AntiPersonnel Landmines (APL) Nearly €3.7 m has been allocated, targeting the destruction of anti-personnel landmines and awareness-raising campaigns in Azerbaijan The EC also makes an annual contribution to the Science and Technology Centre... trade and economic ministries and customs authorities Cooperation in the field of Justice, Freedom and Security The ENP Action Plan with Azerbaijan defines the broad areas of cooperation in the field of justice, freedom and security (JLS) In this context EC assistance will focus on: i) migration and asylum, ii) border management, including document security/biometrics and visas, iii) organised crime and. .. levels of economic and political cooperation and including cooperation on energy, foreign and security policy EC assistance over the period covered by this strategy will therefore aim to support Azerbaijan s ambitious reform agenda (as outlined in the PCA and the ENP Action Plan) to root democracy and the market economy firmly in the country, and to ensure that Azerbaijan manages its oil and gas revenues... Architecture and Construction, the State Committee on Land and Mapping, the State Committee on Land Improvement and Irrigation, the State Statistical Committee, the State Oil Company of Azerbaijan and the State Traffic Police Each of these agencies has a unit specifically responsible for the environmental dimension of their activities Municipalities are responsible for water supply and sanitation activities and. .. sector (strengthened competitiveness and diversification of the economy) Sub-priority 3: Sector-specific regulatory aspects, including public accounting Priority Area 3: Support for legislative and economic reforms in the transport, energy and environment sectors Sub-priority 1: Energy, including reforms of the domestic legislative framework and markets Sub-priority 2: Transport, including reforms of . EUROPEAN NEIGHBOURHOOD AND PARTNERSHIP INSTRUMENT A ZERBAIJAN COUNTRY STRATEGY PAPER 2007-2013 2 Contents: EXECUTIVE. under the new European Neighbourhood and Partnership Instrument (ENPI) being established to promote the development of an area of prosperity and good neighbourliness